In this article I will explore the pros and cons of residential and commercial property investment to help potential investors make informed decisions based on their financial goals, risk tolerance and expertise. 

Residential property investment is often seen as the more accessible and straightforward option, particularly for first-time investors.  

Pros of Residential Property Investment 

• Strong demand: Residential rental properties are vital in Aotearoa, with around one third of the population renting. As New Zealand’s population grows and urbanises, the demand for rentals remains strong. Even in economic downturns people need housing, offering investors some security.

• Consistency: Residential properties must comply with the Residential Tenancies Act, ensuring consistent standards across locations. While unique clauses can’t be added if unenforceable, this consistency simplifies understanding.

• Potential for capital gains: NZ’s residential property market has seen strong capital appreciation, particularly in areas like Auckland, Tauranga and Queenstown. Investors can gain from rental income and capital growth. Enhancing a property with additions like a minor dwelling, deck or kitchen upgrade can boost rental yield and value without needing resource consent.

Cons of Residential Property Investment 

• Compliance and legislation: Residential property investment in NZ faces strict regulations under the Residential Tenancies Act, which imposes maintenance duties, Healthy Homes compliance, and rent increase limits on landlords. These rules can limit flexibility and raise costs for investors.

• Lower yields: Residential properties often yield lower rental returns than commercial. Many residential rentals run cashflow negative, requiring landlords to top up mortgages, especially with rising insurance and rates. While there’s potential for capital growth, rental income as a percentage of the property’s value is typically modest, which can be a drawback for investors seeking high cash flow.

• It can be emotional: Residential property investment isn’t for everyone. Emotions can run high, especially during disputes, as they involve people’s lives and retirements. If you’re sensitive, consider other investment options.

Commercial property investment is buying properties like office buildings, retail space, and warehouses to rent out to businesses instead of individuals.

Pros of Commercial Property Investment 

• Higher yields: Commercial property investment offers the potential for higher rental yields, especially in prime locations with long-term tenants. This can provide investors with a steady and substantial cash flow, making it an attractive option for income-producing investments. 

• Long-term leases: Commercial leases are typically longer than residential, often spanning three to 10 years or more. This long-term commitment offers greater stability, reducing tenant turnover and providing investors with more predictable income and fewer vacancies.

• Tenant responsibility: In many commercial leases, tenants cover most property-related expenses, like maintenance and insurance, under a “net lease”, which reduces the investor’s burden and can lead to higher net income compared with residential properties.

Cons of Commercial Property Investment 

• Higher entry level: Commercial properties often demand a larger initial investment, with higher purchase prices, especially in prime locations. This can limit smaller investors and require more complex financing. 

• Market sensitivity: The commercial property market mirrors the economy. Demand for office, retail, and industrial spaces rises when businesses thrive. However, businesses may shrink or close in downturns, leading to vacancies and lower rental income. The current economic slump has exposed the vulnerability of retail and office spaces to sudden shifts.

• Vacancy risk: When a commercial tenant vacates, filling the space often takes longer than in residential properties, leading to potential income loss, especially in less desirable locations or areas with oversupply. Be prepared for extended vacancy periods when investing in commercial property.

Residential and commercial property investments offer distinct advantages and disadvantages. Residential property investment is generally more accessible, with stable demand, lower entry costs, and potential for capital gains. However, it comes with regulatory complexities, lower rental yields, and tenant turnover. 

On the other hand, commercial property investment provides higher rental yields, long-term leases, and reduced management responsibilities. Yet it requires a higher initial investment, is more sensitive to economic cycles, and can potentially have a property vacant for an extended period. 

The decision between residential and commercial property investment ultimately depends on the investor’s financial goals, risk tolerance, and market knowledge.

Residential properties may be the better option for those seeking stability and lower management demands. Conversely, investors looking for higher yields and willing to navigate the complexities of the commercial market may find commercial properties more rewarding. Diversifying across both sectors can also be a prudent strategy to balance risk and return.